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The principle of discounting is based around the time value of money. This is the concept that money is worth less in the future than it is in the present because of its reduced capacity for generating a return, such as interest, and because of inflation. Discounting is a means of assessing how much less an amount is worth in the future than it is now.

This is the opposite of the concept of ‘compounding’, which describes the rate at with an amount will grow over time due to the accumulation of returns such as interest.